Recovery may cool off but GDP surprise will help RBI pause

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India’s growth at a brisk clip in January-March means the post-pandemic recovery continues apace, allowing the central bank to maintain its pause on increasing rates next week. However, the past is not a good indicator of future performance as the economic momentum is expected to slow, leading to rate cuts later this year, according to economists.

Asia’s third-largest economy grew 6.1 percent in the fourth quarter of FY23, trumping economists’ expectations by one percentage point. Propelled by the last quarter, growth for the previous financial year was revised higher to 7.2 percent.

Reserve Bank of India governor Shaktikanta Das predicted this last week when he said it wouldn’t be surprising if growth last year came in at slightly more than 7 percent.

“The GDP data are in line with the RBI’s view that growth remains resilient. Alongside Q2 inflation tracking around 60bp below its forecast, the ‘Goldilocks’ macroenvironment should strengthen the case for a continued pause in June,” said Sonal Varma, Nomura's chief economist for India and Asia ex-Japan. “However, as the cyclical macro regime shifts from higher to lower growth, amid contained inflation, we expect 75bp of cumulative rate cuts from October onwards.”

Also read: At 6.1%, India’s Q4 GDP faster than the biggest, but there are a few worry lines

Growth to slow?

The growth recovery doesn’t seem to be broad-based, Varma pointed out, as higher investments, higher government consumption, and lower net exports boosted growth on the demand side.

“Overall, government spending (consumption and investment) still appears to be the primary growth driver, while private consumption is lacklustre,” she said.

Most economists expect growth to slow below the RBI’s prediction of 6.5 percent for this financial year amid weakening domestic demand and the looming global slowdown.

Growth indicators for the early part of the April-June quarter painted a mixed picture. While consumption and services held up well, demand for small cars was subdued. Companies selling fast moving consumer goods are suggesting continued pressure from weaker rural demand, Nomura said.

Also read: Is the external sector boost to GDP sustainable?

The RBI’s rate-setting panel held the benchmark interest rate steady at 6.5 percent in April after hiking it by 250 basis points since May 2022. Retail inflation eased to an 18-month low in April. Still, the RBI has been stressing that its latest pause is not a pivot to rate cuts. Last year, the RBI failed to meet its inflation mandate.

For now, the pressure to increase rates may be off.

“The RBI finds itself in something of a sweet spot as the resilient economy has coincided with a drop in core inflation. It will feel under little pressure to adjust policy in its upcoming meeting in early June,” said Shilan Shah, deputy chief emerging markets economist at Capital Economics. “Further ahead, the slight slowdown in growth that we expect will probably help to keep a lid on underlying price pressures and could mean that rate cuts come onto the agenda by the end of the year.”

The next meeting of the Monetary Policy Committee is scheduled during June 6-8.